China Faces a Grad Glut After Boom at Colleges

By IAN JOHNSON NANJING, China -- Zhang Weidong has been making the rounds at this city's weekend talent fair for more than a month now and can't understand why he hasn't landed a job. "These companies are looking for employees, and I have a degree," says the 22-year-old computer major, clutching a plastic organizer stuffed with résumés, business cards and company information. "I don't know what I'm doing wrong." Unemployed university graduates used to be rare in China. But now their ranks are ballooning to critical levels just as the country suffers its worst economic slump in two decades. Up to one-third of last year's 5.6 million university graduates are still looking for work, and this year will see another 6.1 million hit the labor market. Finding jobs for graduates is suddenly a national priority: Earlier this month, the central government ordered local governments and state enterprises to hire more graduates to maintain China's "general stability." See how university student enrollment has grown in China. China is suffering from a higher-education equivalent of the global credit bubble. On government orders, China's universities -- most of which are state-controlled -- boosted enrollment by up to 30% a year, year after year for most of this decade, and built vast new campuses. Financing was considered a cinch: New students would mean more tuition to pay off the loans that funded the expansion. But those plans were wildly optimistic, leaving hundreds of universities across China crippled by debt. More serious for China's long-term prospects is that the expansion was so fast, and the pressures to pay off the debts so intense, that many of the schools turned into diploma mills, churning out poorly qualified students. Mr. Zhang got his degree from a school of traditional Chinese medicine with no history of teaching computer sciences. He looks back ruefully, recalling overcrowded classrooms and a lack of materials: "I wonder if this education was of any value?" Many experts are posing the same question, as China's slowdown highlights problems masked earlier this decade. Back then, when the country's economy was expanding at a double-digit clip, getting a job was easy. Now, companies are pickier and many are refusing to hire some of the products of China's higher-education system. "There is a misalignment between the university system and the needs of the economy," says Robert Ubell, who heads a New York University program in China to train young Chinese employees of foreign companies. "Chinese graduates often have few practical skills." The problem lies in the middle layer of China's educational system. The country's basic education ensures that most Chinese are literate, which means that even poor farmers heading to the country's coastal factory boomtowns can easily be trained to operate a machine. At the system's peak are 75 elite universities lavishly funded by China's central government. Because these schools' expansion has been controlled by Beijing, they have been largely exempt from financial problems. Beneath the elite universities are 2,100 others where the vast majority of Chinese undergraduates study. Almost all are saddled with virtually unserviceable debts, say official sources and independent researchers. In impoverished Anhui province, 50 universities owe $1.2 billion to banks, according to Zhao Han, who is vice president of the Hefei University of Technology in Anhui. Mr. Zhao, who is a government adviser with access to the financial figures, says some schools have debt payments that equal half of their tuition revenues. "It is a heavy expenditure affecting the schools' normal operation," he says. View Full Image Getty Images Graduating university students pack a job fair in Nanjing, China, late last year as joblessness among grads soars. Local governments with financial muscle are already organizing bailouts. Last year, wealthy Guangdong province ordered banks -- almost all of which are state-controlled -- to restructure their loans to universities. The province also spent $30 million this year to prevent a string of universities from defaulting. Officials at China's Ministry of Education refused to be interviewed for this article, but have said in speeches that university debts are a top priority. "Objectively there was a need to expand education," says Yang Dongping, head of a nongovernmental organization dedicated to education reform. "But we've just experienced an educational disaster." Some see the trend more optimistically. Hu Angang, a prominent economist at Tsinghua University, says China is paralleling the expansion of universities in the U.S. after World War II. Back then, the G.I. Bill allowed returning soldiers to attend college, opening higher education to broad reaches of society and supporting America's long-term economic rise. The current problems, he says, will work themselves out in the long run. "China's expansion was correct," says Prof. Hu. "It was part of a new deal launched to spread education beyond the elites." For much of Chinese history, higher education had been the purview of the country's Confucian elite. The communist revolution in 1949 did little to change this, with university education reserved for a tiny fraction of the population. Periodic student protests reinforced government suspicion of this class. University 'Cities' Then came 1998. In the midst of the Asian financial crisis, the country's hard-charging premier, Zhu Rongji, decided China needed bold measures. He ordered universities to open their doors. A more skilled Chinese work force, he reasoned, would jump-start domestic consumption, helping to wean China's economy off exports. In 1998, 3.4 million Chinese attended university. By last year, the number was 21.5 million. To handle the surging enrollment, schools spent nearly $100 billion, according to estimates by Chinese researchers, on vast university "cities" of spacious campuses and impressive buildings. But the government was tightfisted. Schools were told to borrow what they needed. Banks, which are also state-controlled, obliged. With little tradition of alumni giving in China, universities had two ways to free up funds to pay off this debt -- slashing costs and luring more students. Teachers' salaries were capped or cut, equipment purchases were put on hold and classroom sizes on average doubled across China, according to government statistics. While experts say the country needs midlevel technical staff, many of these universities have tended to lure tuition-paying students with programs such as English, tourism, government, journalism and law. These are cheap -- no large outlays for equipment are necessary -- and appeal to Chinese sensibilities, which see education as a path to a government or other white-collar position, and not as training for a technical job. The legacy of a decade of haphazard expansion is on display at the school where Mr. Zhang studied computers, the Nanjing University of Chinese Medicine. In the 1990s, the school was a vibrant center of learning that instructed 1,500 students in traditional healing arts. Even though China has relatively few hospitals of Chinese medicine, its graduates almost always found jobs. From the 1950s onward, they had gone on to run prestigious hospitals and research institutes across the country. That tradition ended with the government's expansion order in 1998. The next year, the student body increased by a third. The tiny campus in downtown Nanjing was bursting, with students housed in hotels and taught in cafeterias. The next year, the school began to build. It borrowed $200 million from a consortium of banks -- school officials won't say which, but members of the university's administrative committee say the country's four biggest banks were involved. All four refused to comment. University administrators embraced growth. In a published interview a few years ago, the school's former president, Xiang Ping, said expansion was a chance to boost prestige. When traveling to conferences, foreign educators hadn't treated him seriously because his school was so small. By the time of the 2006 interview, he said, they saw him as head of a large, comprehensive university. "It is huge progress," he said. The school moved to Nanjing's Xianlin University City, a 42-square-mile campus it shares with 11 other universities on the outskirts of town. The front gate is adorned with a fountain and a giant rare stone from a nearby mountain. Construction was plagued by corruption. In 2004, government auditors found that only half the University City area was used for education, with the rest used for commercial projects such as a golf course. Arrests followed, with a top official at the Nanjing University of Chinese Medicine convicted of bribery. Some teachers are outraged. One prominent critic is Ji Wenhui, a scholar of classical medical texts and former head of the library. He watched as the library's holdings increased by one-half while the number of students rose 11-fold, to 17,000. The university has 1,200 faculty and staff, only 20% more than when it was many times smaller. The new library has a leaky roof and lacks many basic electronic tools, such as academic databases. "The reason for expanding had nothing to do with society's needs," Mr. Ji says. "The educational system was pursuing economic benefit." A faculty member of the school's administrative council, Mr. Ji says internal reports showed that the school at one point was committed to $60 million a year in interest payments versus total annual revenues of $30 million. In 2006, the provincial government stepped in and restructured the loans. The school currently spends one-quarter of its budget on debt repayment and has cut teachers' salaries by a quarter, Mr. Ji says. In a faxed response to questions, school administrators declined to address specifics such as student-faculty ratios and spending on materials and supplies. It said the provincial government had been helping the school. "The debt risk is completely under the school's control," the statement read. A statement posted on the university's Web site says the school faces a "complicated situation" and that "the huge debts for new campus construction have caused serious shortages of funds for school management, restricting development of the school." Three Years of Study Few feel these limitations as acutely as the students, even those who came to study Chinese medicine. Sitting in the university's giant cafeteria one rainy afternoon, Chen Sanxing said the education didn't live up to the school's great history. Classes are overcrowded, he said, and there are too many students for the limited interning opportunities at area hospitals. "A lot of the students are here so the school can make money," Mr. Chen said. "That's why they opened all those hot majors." The school's new offerings include international economics and trade, applied psychology and English. Students in these departments say they've been shorted, too. Mr. Zhang, the jobless computer major, says that while his degree sounds useful enough, the training has been sketchy. Like other students here, he said his formally four-year program lasted three years. Students are meant to spend their fourth year looking for work, as he is now doing. Mr. Zhang says computer labs at the school are plentiful, but his classes had more than 100 students and there was no tutoring, little interaction with teachers and a shortage of computer texts. Although this year marks the 20th anniversary of the student-led Tiananmen Square protests, few seem ready to take to the streets. Instead, a sense of gloom is pervasive. Jane Yang, a 21-year-old English major here, nicknames herself "Cheer-up Jane" because she's so pessimistic about the future. "There are no job prospects for someone like me," she said during a quick meal at the school's cafeteria. "I think I'll just go to grad school." —Ellen Zhu contributed to this article. Write to Ian Johnson at ian.johnson@wsj.com